Category → M&A
Last week, TPC put out a proxy statement for its controversial $40.00-per-share sale to First Reserve and SK Capital. Shareholders, as evidenced by quotes between $41.00 and $42.00 for the company, are looking for a better offer. And Sandell Asset Management, which owns about 7% of the firm, has been outspoken against the deal. In such cases, disgruntled shareholders always argue that company management didn’t do enough to shop the company around for a better price.
The Chemical Notebook has examined the proxy to get an idea about who was kicking in TPC’s tires and how serious they were:
First Reserve (private equity) and SK Capital (private equity): These companies first darkened TPC’s door in early December with a $30.00 to $35.00 offer. This was rejected by TPC management. However, in early January, TPC and these parties signed a confidentiality agreement and First Reserve and SK conducted due diligence. These efforts yielded a $40.00 to $42.50 proposal by mid-February and a merger agreement was drafted. But in March, TPC’s stock price climbed to an all-time high of $47.03, forcing First Reserve and SK to abandon their bid. When the stock price declined back down in May, First Reserve and SK renewed their efforts. This yielded a $40 “best and final” offer in July. On July 27, SK and First Reserve signed an exclusivity agreement with TPC. The deal was announced on August 27.
Party A (strategic bidder) and Party B (PE): These firms first signed a confidentiality agreement with TPC in January. Later that month, they decided not to pursue a deal because of other priorities. These parties later emerged from time to time throughout the sale process. In May, they told TPC that they might submit a proposal, but they didn’t. In early August, they indicated that they might be interested again if TPCs stock price declined further.
Party C and D (both PE): These companies emerged in late January with a $38 to $38.50 offer. They presented TPC with a draft merger agreement in mid-March. They dropped out in mid-April because of the rising stock price. They reemerged in May 17 but dropped out for good on June 21 because of financing concerns.
Party E (strategic): Contacted by TPC representatives in late-February, Party E said that it wasn’t contemplating strategic investments. It told TPC in mid-May that it wouldn’t submit a proposal.
Party F (non-U.S. strategic): Expressed interest in early April. It said on May 18 it was interested in a bid. TPC representatives traveled to Party F’s headquarters in early June. At the end of the month, Party F informed TPC that it would not submit a bid.
Party G (strategic bidder): It was contacted by TPC representatives. In early June, it said that it was concerned with regulatory impediments (probably antitrust) to a merger. Later that month, it told TPC that there would be no merger due to those concerns.
Party H (strategic): Approached TPC in May but nothing materialized.
Party I (strategic): Indicated interest in late June and made a $36 per share proposal in July. Talks were promptly terminated.
The Chemical Notebook’s two cents: Interest in TPC seems meager. And the highest proposal it heard was $42.50 from SK and First Reserve. (Something would have to be dreadfully wrong if they don’t at least up the bid to that.) On the other hand, with shareholders recently seeing $47.00 per share, I do wonder why the company agreed to sell itself at all.
To counter that argument, TPC would likely point to expensive dehydrogenation projects that it needs to stay competitive. It argued as much in the proxy. The expenditures on these would exceed the company’s market capitalization, it said. Alternative financing strategies, such as forming a master limited partnership, would have to be employed. TPC shareholders would thus not benefit from all of the upside of these investments. True, but some of the upside is better than none of it.
Last week, the Chemical Notebook headed to New York City to attend the 2012 IHS Chemical Financial Forum. Nice event, attended by 60 or so. It was emceed by Robert Westervelt, editor-in-chief of IHS Chemical Week. My dear longtime frenemy did a masterful job moving the conference along and asking good questions, as he usually does.
It was a day packed with a lot of good speakers. Curt Espeland, chief financial officer of Eastman Chemical, gave the keynote, which was an overview of his company’s merger and acquisition strategy. This is a pretty timely topic given that Eastman is set to complete its $4.7 billion acquisition of Solutia next month.
Eastman’s current M&A strategy is rooted in the turnaround that former CEO Brian Ferguson led a decade ago. Eastman had been a serial acquirer. It made expensive purchases of publicly traded firms like McWhorter Technologies and Lawter International to build up its coatings, adhesives, specialty polymers, and inks (CASPI) business. The acquired business didn’t congeal as planned.
When Brian Ferguson took over in 2002, he initiated a three-part strategy for the company, Espeland says. The first part: Shrink before you grow. Eastman sold off $3.2 billion worth of business since 2002. This includes the sale of a large chunk of the CASPI-related businesses it had bought. Momentive now has those units. Eastman sold its polyethylene business to Westlake.
A series of divestitures got Eastman out of polyethylene terephthalate. “Before we started this journey, we were the largest PET producer in the world,” Espeland told the audience. “Today we don’t even make the product in any meaningful way.” Worth noting here is that while it got out of commodity packaging polymers, Eastman kept specialty polyesters, leaving intact a core chemistry capability. This seems to be paying off with its Tritan polymer.
The next part of Eastman’s strategy: Earn the right to grow. This entailed improving the profitability of the business that it kept.
Now with new CEO Jim Rogers, Eastman has switched to its third phase: growth. “Joint ventures and acquisitions has become the primary tool we’re using to pursue that strategic shift,” Espeland said.
Curiously, the pre-Ferguson era fomented queasiness over acquisitions at Eastman. “In fact, we had a negative bias against acquisition because of our history in the late 90s,” he said.
Management had to reverse that. The company started out small, focusing on small “bolt-on” acquisitions. Through purchases such as Genovique Specialties and Sterling Chemicals, Eastman has quietly doubled the size of its non-phthalate plasticizer business, to $600 million.
These acquisitions helped Eastman build capability and confidence—enough to attempt the purchase of Solutia, a deal about 30 times larger any purchase it has contemplated in the current era.
Espeland says the strategic fit between Eastman and Solutia justifies the scaleup. The two firms, he said, are similar in profile. Following its 2003 bankruptcy, Solutia also went through a shrinking phase, getting rid of businesses such as nylon.
Moreover, Solutia is built around strong market positions in business like its Saflex polyvinyl butyral glass interlayer sheet and its insoluble sulfur tire vulcanizing agent. Eastman sees synergies with these businesses. For instance, the company hopes to introduce cellulose-based specialty polymers into tires.
Additionally, and this isn’t something that Espeland highlighted in the talk, there seem to be manufacturing synergies as well. Eastman makes or buys eight of Solutia’s 10 most important raw materials. For instance, Eastman is the largest U.S. producer of n-butyraldehyde, used to make PVB. It’s interesting that Eastman is contemplating building metathesis in Longview, Texas, which would give it more propylene and further enhance the back-integration of its oxo-business.
To listen to Espeland, it doesn’t seem that Eastman is done making acquisitions, though it will pause at it digests Solutia. “After we get through a period of deleveraging, Eastman will be in a position of strength and have the cash to continue to do joint ventures and acquisitions,” he said. When asked about the M&A environment, he joked that while landscape was rife with acquisition targets “no one should look at chemical deals for the next year as we deleverage.”
I arrive the office this morning, bright and early, as usual.
“Your Top 50 U.S. chemical company survey will get smaller by one company,” C&EN assistant managing editor, Mike McCoy, said.
“Do you want me to guess?” I said.
“Solutia is one of the firms.”
“That is the company being acquired,” I reply.
“PPG is buying them,” I guessed.
“No, but that’s an interesting guess,” Mike says. It was a very good guess.
“No, too soon.” Ashland, Mike realized, just bought ISP.
“Very good!” Mike exclaimed, very impressed.
Indeed, Eastman is buying Solutia in a $4.7 billion transaction. The relevant details are in my Latest News story here.
I have a few observations:
1) It seems like a nice, square deal for all parties. My calculations put the cash and stock portion of the deal at $3,357 million and the debt at $1,377 million, combining for the ~$4.7 billion price. The cash and stock represent a 13.8x multiple over adjusted earnings of $243 million.
2) Since declaring bankruptcy in 2003, Solutia has honed its business where it has a strong position such as hydraulic fluids and polyvinyl butyral (PVB) interlayers for windshields. The cash cow of the portfolio is the technical specialties business, which generated a 38% EBITDA margin. It makes the hydraulic fluids, heat transfer fluids, and insoluble sulfur, used to vulcanize rubber.
3) Integration? PVB is made by reacting polyvinyl alcohol, which Solutia makes, with n-butyraldehyde. It just so happens that Eastman is America’s largest producer of n-butyraldehyde, which it uses to make oxo derivatives like 2-ethylhexanol.
4) Solutia is an ex-Monsanto business. Sterling, which Eastman acquired last year, is a former Monsanto unit. Spooky? Yes. Coincidence? Probably.
Here at the Chemical Notebook, we recently posted about some rumors swirling regarding DuPont possibly putting its coatings business up for sale. At DuPont’s investor day yesterday, DuPont CEO Ellen J. Kullman fielded a question about this from Deutsche Bank analyst David Begleiter. In her answer, she revealed that she’s none too pleased with the reports:
Yes, I mean, around the rumors that have been swirling, quite frankly, I’m a little appalled at the (inaudible) responsibility of certain media outlets. I think it’s just terrible. I mean, I go into places and some people say, hey, I saw your announcement. Obviously, we didn’t make one. But we have 13 businesses. We put them through a very vigorous portfolio process around markets, competition, our capability, and science. We establish very clear goals. And we expect them to meet them. We put in top leaders like John McCool, who just went in to coatings a year ago. And very specific goals for improving.
But we’ve been very clear. If things — any business. I love all my children equally until I don’t love them. It’s my phrase. Now that does bother my own children, but in business it seems to work. But I mean, so time we’ll tell about any part of our portfolio and where it sits. You saw the pruning that we do on the product lines that both industrial chemicals and crop protection and things like that have done in the list. But if something changes, we’ll be the first one to come out and talk to you. But first and foremost, we’ve established aggressive goals. We have the right kind of leadership. Let’s see what we can get done.
A few points:
1) Two of these reports, from Bloomberg and Reuters, broke on the afternoon of October 28, nearly simultaneously, citing people familiar with the matter. (My previous post links to all three). Dow Jones had its own version a few days later. When a story is deemed solid, journalists are under no ethnical obligation to await an official announcement.
2) Perhaps Kullman should be lecturing the probable leakers. DuPont’s investment bankers would be a good first call. Though, they were probably using their best judgment, too.
3) Extending the children analogy. Is the coatings business that adult child that still lives with his parents and needs a gentle push into his own apartment?
4) I remember back in 2007, Britain’s Sunday Express ran a kooky story about how private equity firms and a Middle Eastern government were planning a takeover of Dow Chemical. CEO Andrew N. Liveris noted that the rumors appeared “on the third page of a third-rate newspaper in the U.K.” It later turned out that such parties, and two Dow executives, really were conspiring to sell Dow. Liveris fired them when he learned about it, straight from the lips of J.P. Morgan CEO Jamie Dimon.
I thought the news flow had been a little slow lately.
PricewaterhouseCoopers has released its quarterly Chemical Compounds newsletter that tracks merger and acquisition activity. It looks like we are in the middle of a full-fledged deal slump.
There were 22 chemical deals worth $50 million or more in the third quarter of 2010, the accounting and consulting firm reported. During the second quarter, there were 31 deals of that size. The last time there were 22 or fewer deals was in the second quarter of 2009, right at the tail end of the credit crunch/recession.
Average deal size actually increased during the quarter, from $476.4 million in Q2 versus $725.6 million in Q3. But the Q3 number is a little on the low side historically. Moreover, four deals weighing in at over $1 billion drove up the figures. These are Ecolab’s purchase of Nalco ($8.1 billion); Tronox’s merger with Exxaro’s mineral sands unit ($1.3 billion); Lonza’s offer for Arch Chemicals ($1.2 billion); and OM Group’s acquisition of Vacuumschmelze ($1.0 billion).
[I know what you’re thinking: What the heck is a Vacuumschmelze? No, it isn’t that gunk you find when you clean out your Hoover; it is a German magnetic materials maker.]
The pace of chemical making was especially slow in Q3 for private equity firms. Financial buyers accounted for only 1.25% of the total of $16 billion in transactions. This is the lowest level ever since PwC started tracking M&A in 2006. “This shift may be due to the relative advantage that strategic investors have given their ample cash stockpiles, in addition to generally higher valuations in the sector,” PwC said in the report.
Cytec Industries CEO Shane Fleming dropped an “O” bomb on Cytec’s coatings resins business during a conference call last week. “We are committed to maximizing value creation in this segment and will take the decisions necessary to do so,” he said. “We are currently reviewing all options for this business and we will provide a further update on our plans no later than our earnings guidance on our fourth quarter conference call.”
“Reviewing options” always indicates that a company is entertaining the idea of selling a business. However, it doesn’t always mean that the company will end up selling the business. They often keep parts of the business and sell off and/or close other bits of it.
The coatings resins business generated operating earnings of $68.2 million on $1.4 billion in sales last year. It makes resins for powder, radiation curable, and liquid coatings. It is Cytec’s largest segment by a mile, representing 52% of its 2010 revenues. Its profit margins, at just under 5%, are also the company’s thinnest, with Cytec earning a total operating profit margin of about 10%.
During the conference call, Fleming said he expects the company to make $57 million to $60 million in operating income on about $1.6 billion in sales.
Fleming did keep the door open to making the business work within Cytec, primarily through favoring specialty resins over more commoditized products. “We’ve got a portion of our coatings resins product line right now that’s just now meeting our return on capital,” he said. “That is out first goal. It’s to get the business to a point where it’s doing that.”
For example, in the conference call, Cytec also disclosed it is closing a powder coatings resins plant in Suzano, Brazil, and took a $9 million charge in the third quarter for this shutdown.
But Fleming said that separating the good parts from the bad parts might not be so easy. “You can identify the product areas where you’re covering the cost of capital and generating reasonable earnings,” he said. “But the pragmatic question is, can you pull those apart and operate them separately given the level of entanglement with the asset base?”
Sounds like Cytec might punt that problem to the next owner.
Cytec’s coatings resins business is a bit of a hot potato. It was originally part of Hoechst under the name Vianova Resins. Hoechst sold the business to Morgan Grenfell Development Capital in 1998 for $545 million. Solutia bought the business a year later for about $617 million. In early 2003, Solutia sold the business to Belgium’s UCB for $500 million. It had earned $22 million for Solutia on $559 million in 2002. UCB added businesses to the unit, including, as I recall, rad-cure and amine resins. It sold the unit to Cytec for cash and stock valued at $1,774.3 million in 2005.
During the call, Cytec CFO David Drollick put the book value of the business at $1.4 billion.
The company also had other news last week. In its earnings report last week, the company disclosed it sold its Stamford, Conn., to an undisclosed buyer, for $11 million, on September 30. It said it was leasing back parts of the facility for a seven year period and conducting a $1.1 million environmental remediation on the site. Interestingly, the company estimates the book value of the facility to be $32.5 million. It will take a charge when the remediation project is completed.
This week saw a good old fashioned back-integration deal in the chemical industry. I wrote a C&EN Latest News on the merger of Tronox with Exxaro’s Mineral Sands unit that includes the essential details. Not every factoid can make it into limited space, thus here are a few more observations:
- Tronox’s back-integration isn’t unique. DuPont runs mining operations near Jacksonville Florida. Cristal, which is largely the former Millennium Inorganic Chemicals, has mineral sands operations in Brazil and Australia. The Brazilian mine came with Millennium’s purchase of Bayer’s TiO2 plant in Bahia, Brazil. Here’s an article I wrote about the mine back in 1998 for the then Chemical Market Reporter. Turns out, Millennium kept the mine after all. Cristal’s Australian mine is a relatively new development. In 2008, Cristal took over full control of Bemax, an Australian mining firm. It previously had a 34.5% interest.
- The financial details are a little hairy, which I why I left them out of the C&EN story. I won’t get into them much here either. The old Tronox and the Exxaro assets will be pooled into a new holding company, which will be split 61.5%/38.5% between existing Tronox shareholders and Exxaro Resources. (There are different classes of existing Tronox shares, which is only important to Tronox shareholders.) The new company will be “domiciled in Australia”, which means technically headquartered in Australia, but will trade on a major exchange, probably the New York Stock Exchange. Exxaro is retaining a 26% stake in the South African mining operations to fulfill local regulatory operations. When those requirements eventually expire, Exxaro will have an option to swap that stake for another 3.2% of Tronox.
- Recent share prices imply a value of $3.4 billion for the new Tronox.
- In 2009, Huntsman Corp. tried, and didn’t succeed, to buy most of Tronox’s assets out of bankruptcy for $415 million. Incidentally, Huntsman’s last major acquisition was Ciba’s textile effects business back in 2006. Five years without a major Huntsman acquisition feels like an eternity.
- The premise of Tronox’s acquisition is to facilitate the expansion of its TiO2 pigment business by securing a supply of ore. The company is now considering a new pigment plant in South Africa. It should be noted that Tronox’s existing joint venture with Exxaro, Tiwest, is integrated into mineral sands in Western Australia. The partnership completed a capacity expansion late last year. The 40,000-metric-ton-per-year increase brought capacity there up to 150,000 metric tons.
Lyondell has hired an investment banker to help it sell its refinery in Berre, France. Lyondell bought the refinery in 2008 from Shell for $700 million. The 105,000 bpd refinery “has not fulfilled economic projections made at the time of the acquisition,” the company says.
It isn’t like they gave it a lot of time to work. OK, who am I kidding? Lyondell’s refining segment, which also includes its 292,000 BPD refinery in Houston, lost $2.4 billion in 2008, and $360 million in 2009. It managed to pull in a $242 million profit in 2010 on $15 billion in sales. All of Lyondell’s business have greater operating profit margins than refining.
Lyondell is keeping the ethylene cracker, polyethylene, and polypropylene plants on the site. It so happens that I visited Berre in the late 1990s. A plant manager or someone—I’m not totally sure because he spoke only French—gave me a personal tour. We stood on a high promontory, he struck Napoleonic poses with his hand on his tummy and kept on saying “voilà.”
Anyhow, Elenac—the BASF/Shell polyethylene joint venture that is now a part of Lyondell–was constructing a plant at the site when I was there. I think there was something happening to a Montell polypropylene plant while I was there as well. My point is that the polyolefins plants are probably in good shape because they are relatively new.
I do wonder what Lyondell will do with the Houston refinery. It has been a part of Lyondell since the company was spun off of Atlantic Richfield in 1985. For most of those years, it was a joint venture with Venezuelan state oil company PDVSA and made gasoline for Citgo stations. Lyondell bought out PDVSA’s share of the JV in 2006.
The refinery gets crude under contact from PDVSA. Obviously, that isn’t a great position to be in. It got less than half of its supply from PDVSA in 2010. I recall it received much more of its feedstock from PDVSA a decade ago. Interestingly, that contract is up in July. I’m curious to see what happens.
Berkshire Hathaway has put out a report on top exec David Sokol’s resignation in March over shares he purchased in Lubrizol before Berkshire’s takeover was announced.
At the time, I was wrong on this blog when I said:
“This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.”
Turns out, according to the report, there was more to the story than that:
He did not disclose:
* the amounts and timing of his purchases;
* the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;
* the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) had asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and
* the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.
Though, the report suggests that Sokol won’t have to exchange his pin stripes for prison stripes.
We appreciate that at the time Mr. Sokol traded, he did not know whether Mr. Buffett would support, or reject, the idea of an acquisition of Lubrizol. We also recognize that Mr. Sokol did not know how Lubrizol would respond to an acquisition proposal if Berkshire Hathaway were to make one. We recognize the view that those uncertainties might have kept Mr. Sokol’s information below the level of probability required to support a finding of materiality for purposes of finding a violation of federal insider trading law. But the Trading Policy requires a higher standard of conduct than what is required to avoid being charged with a federal securities violation.
I like the last sentence. It reminds me of the old Hebrew National commercials.
My take: Why would someone blow their chance to be Warren Buffett’s successor for a measly $3 million? Berkshire doesn’t disclose Sokol’s salary or stock holdings in its proxies. In any case, I’m sure he’ll land on his feet.
Some of you may have heard the news that Berkshire Hathaway executive David L. Sokol has resigned. Sokol bought 100,000 shares of Lubrizol and suggested to Buffett that Berkshire buy the whole company. Here’s the Lubrizol-related excerpt from Buffett’s statement about the resignation:
Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.
That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.
Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.
Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board of which Dave is not a member.
As late as January 24, I sent Dave a short note indicating my skepticism about making an offer for Lubrizol and my preference for another substantial acquisition for which MidAmerican had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in the acquisition of Lubrizol.
Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.
Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.
This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.